dimanche 5 avril 2015
Broken Bond Market Complicates Fed’s Plan to Raise Rates
Posted on 23:37 by nice news
The bond market is broken.
Whether it is banks’ reluctance to commit to buying and selling bonds, shortages in the securities used as collateral in short-term money markets, or the disproportionate role of heavyweight issuers in the supply of U.S. corporate bonds, dysfunction is everywhere. As the Federal Reserve prepares to raise rates, this is raising questions about how well it can manage the credit creation process, the transmission mechanism through which it pursues its economic goals. It might also mean it is risking financial turmoil.
Bond geeks are decrying illiquidity – the idea that there aren’t enough standing bids or offers in the marketplace for investors to move quickly in or out of large positions. Combine that with the uncertainty that the Federal Open Market Committee has deliberately fostered around the timing of its first rate increase in eight years and you have the prospect of investors having to unwind bets at a big loss. Such risks could in turn further discourage banks and investment managers from putting money into the market.
“There seems to be a conflict between low liquidity in markets requiring more and more predictability and the Fed wanting to have more flexibility,” says Deutsche Bank economist Torsten Slok. The “lack of liquidity could trigger a volatile reaction in fixed income markets as investors re-position for whatever decision the FOMC takes.”
Last month, the Bank for International Settlements noted “signs of increased fragility and divergence of liquidity conditions across different fixed income markets.” The problem, the BIS said, is that “market-making is concentrating in the most liquid securities and deteriorating in the less liquid ones.” In other words, the broker-dealers that commit to buy, sell and hold portfolios of bonds so that institutional money managers can readily trade them in the secondary market aren’t doing so for anything less frequently
Whether it is banks’ reluctance to commit to buying and selling bonds, shortages in the securities used as collateral in short-term money markets, or the disproportionate role of heavyweight issuers in the supply of U.S. corporate bonds, dysfunction is everywhere. As the Federal Reserve prepares to raise rates, this is raising questions about how well it can manage the credit creation process, the transmission mechanism through which it pursues its economic goals. It might also mean it is risking financial turmoil.
Bond geeks are decrying illiquidity – the idea that there aren’t enough standing bids or offers in the marketplace for investors to move quickly in or out of large positions. Combine that with the uncertainty that the Federal Open Market Committee has deliberately fostered around the timing of its first rate increase in eight years and you have the prospect of investors having to unwind bets at a big loss. Such risks could in turn further discourage banks and investment managers from putting money into the market.
“There seems to be a conflict between low liquidity in markets requiring more and more predictability and the Fed wanting to have more flexibility,” says Deutsche Bank economist Torsten Slok. The “lack of liquidity could trigger a volatile reaction in fixed income markets as investors re-position for whatever decision the FOMC takes.”
Last month, the Bank for International Settlements noted “signs of increased fragility and divergence of liquidity conditions across different fixed income markets.” The problem, the BIS said, is that “market-making is concentrating in the most liquid securities and deteriorating in the less liquid ones.” In other words, the broker-dealers that commit to buy, sell and hold portfolios of bonds so that institutional money managers can readily trade them in the secondary market aren’t doing so for anything less frequently
Broken Bond Market Complicates Fed’s Plan to Raise Rates
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